Sembcorp Industries Ltd - UOB Kay Hian 2015-10-30: 3Q15 ~ Utilities Take Centrestage As Marine’s Role Diminishes

Sembcorp Industries Ltd - UOB Kay Hian 2015-10-30: 3Q15 ~ Utilities Take Centrestage As Marine’s Role Diminishes @ SG ShareInvestor SEMBCORP INDUSTRIES LTD U96.SI 

Sembcorp Industries Ltd (SCI SP) - 3Q15: Utilities Take Centrestage As Marine’s Role Diminishes 

  • SCI’s 3Q15 net profit was below our expectation on sharply lower marine earnings. 
  • Singapore utilities were affected by doubtful debt provision while utilities expansion in India is on track. 
  • We lower our core net profit forecasts (excluding exceptional gains) for 2015-17 by 10-15% on lower marine earnings. Utilities take centrestage as marine’s role diminishes. 
  • Maintain BUY. Target price: S$4.50. 


RESULTS 


 Marine posted a poor performance. 

  • Sembcorp Industries’ (SCI) results were below our expectation due to a collapse in marine earnings. Marine accounted for 16% of SCI’s 3Q15 net profit while utilities net profit accounted for 74%. 
  • Marine’s 3Q15 net profit fell sharply by 76% yoy to S$20m while utilities net profit declined by 21% yoy. 

 Poor marine earnings. 

  • Sembcorp Marine (SMM) had earlier reported a net profit of S$247m for 9M15, which accounted for only 56% of our full-year net profit of S$445m. 
  • SMM’s turnover in 3Q15 fell 34% yoy to S$1.1b while operating profit was lower by 56% yoy to S$74.7m. 
  • Operating margin collapsed to 6.6% in 3Q15 from 10.0% a year ago. 
  • Pre-tax profit fell by 87% yoy to S$22m while net profit declined 77% yoy to S$32m, despite a tax write-back of S$10.2m. 

 Grief from 5 jack-up rigs. 

  • SMM said they have stopped recognising revenue from five drilling jack-up rigs (Perisai: 2 units, Oro Negro: 3 units) in Aug 15. Earlier profit recognised from these five rigs was reversed in 3Q15. These rigs are on 20:80 payment terms. Only 20% has been collected by SMM. 
  • We had earlier flagged the risks of the seven jack-up rigs (2 for Perisai, 3 for Oro Negro, 1 for Marco Polo and 1 for Hercules). SMM’s associates' losses came in at S$24.4m in 3Q15 due to COSCO Shipyard Group (CSG). A S$17.1m impairment charge was also made relating to SMM’s investment in CSG. 
  • The losses were offset by a forex gain of S$35.1m and a tax write-back of S$10.2m. 

 Utilities’ underlying performance was decent. 

  • Utilities net profit was dragged down by provisions, higher corporate expenses and start-up losses at SCI’s Indian power plant. There was an allowance of S$23m for doubtful debt in its Singapore operation. This was offset by overseas profits and divestment gains. 
  • The second phase (660MW) of SCI’s 1320MW new power plant in India came on stream in Sep 15. The power plant, which is still being ramped up, made a loss of S$12m in 3Q15. Management is confident it will achieve break even by end-15. 


STOCK IMPACT 


 Overseas power utilities to expand. 

  • SCI is expected to expand its effective power generation capacity by 25%, 24% and 14% yoy in 2015, 2016 and 2017 respectively. India dominates in SCI’s capacity expansion plan. 
  • Projects in the 2015 pipeline include (on a gross capacity basis) 120MW of wind assets from Green Infra and 1,320MW from the TPCIL in India, and 300MW from the Chongqing power plant (pending approval). 

 Serious headwinds at SMM. 

  • We believe there is a high probability that SMM might exercise its contractual right in the three Oro Negro rigs. This would entail annexing the units if payment is not forthcoming. Shareholders of Oro Negro – including Temasek Holdings which owns a 22.5% stake - might not pump further equity into the company. 
  • The three Oro Negro rigs are 95% completed, while the two Perisai units are estimated to be 90% and 50% completed respectively. Only 20% of their contract amounts have been collected for the 5 units. 


EARNINGS REVISION/RISK 


 Lowering 2015-16 core net profit forecasts by 10-15%. 

  • SCI recently divested its 40% stake in Sembsita Pacific Pte Ltd to its 60% JV partner, Suez Environment Asia (Suez) for a sale consideration of A$485m, realising a gain of S$350m. Sembsita operates an integrated waste management business in Australia. 
  • Our 2015 net profit is raised by 32% because of the disposal gain. However, we have cut our core net profit forecasts for 2015-17 by 10-15% primarily due to lower marine earnings. 
  • We had earlier slashed our 2015-17 earnings forecasts for SMM by 20-35%. This was due to a change in our operating margin assumption from 13% to 10%. 
  • We also cut 2016 contract win assumptions to US$3.0b, so our new assumptions are S$2.5b, S$3.0b and S$5.0b from S$2.5b, S$3.5b and S$5.0b for 2015-2017 respectively. 


VALUATION/RECOMMENDATION 


 Target price tweaked from S$4.69 to S$4.50 based on SOTP valuation. 

  • We factor in a revised target price of S$2.34 for SMM and value SCI’s utilities business at 2016F PE of 12x. We maintain our BUY call. 


SHARE PRICE CATALYSTS 

  • Earnings contributions from the new power plants in India. 
  • On the flip side, a prolonged downturn in the oil & gas sector could be a drag. 


Nancy Wei CFA UOB Kay Hian | Foo Zhi Wei UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-30
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 4.50 Down 4.69


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